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Inexpensive oil vanishing at alarming rate

The Globe and Mail, 13 December 2013

The United States is awash in shale
oil. Iran, once OPEC’s second-largest producer, is slowly ramping up output.
Oil consumption growth in the Western world has been somewhere between negative
and flat since the 2008 financial crisis. The “peak oil” theory has pretty much
vanished, along with The Oil Drum, the bible of peak oil believers. Rest in
Or turn in your grave, for the oil
price charts tell a different story.

On the New York Mercantile Exchange,
crude oil futures are up 13 per cent over one year. Since 2009, they have
climbed every year except 2012. In Europe, the Brent crude futures are flat
over the year after rising three years on the trot. Brent, the de facto global
benchmark, trades at about $108 (U.S.) a barrel; West Texas Intermediate, the
North American benchmark, is at $97. For the sake of argument, let’s say the
world is valuing oil at $100. You would think the price would be far less as
the United States challenges Saudi Arabia for top producer status.

While the oil forecasters were pumping
out bearish calls, the market itself has stuck to its triple-digit price
outlook. Oil buyers apparently know the Western world’s economic recovery will
boost consumption, since growth and oil use are aligned. That’s not all. They
also know that the math doesn’t work: Prices can’t go into gradual, long-term
decline, or even stay flat, when the world’s conventional oil fields are in
fairly rapid decline.

Exotic production – oil sands,
biofuels, natural gas liquids – are supposed to fill the gap. But this
so-called unconventional production is highly expensive and quite possibly
insufficient to cover the drop off in cheap, conventional production. Prices
will rise to the point that demand will have to level off or fall. The “peak
oil” and “peak demand” theories are really opposite sides of the same coin.

A few days ago, Richard Miller, the
former BP geochemist turned independent oil consultant, delivered a sobering
lecture at University College London that laid out the case for dwindling
future oil supply. His talk was based on published data from the U.S. Energy
Information Agency, the International Energy Agency, the International Monetary
Fund and other official sources.

The data leave no doubt that the
inexpensive oil is vanishing quickly. Conventional oil production peaked in
2008 at about 70 million barrels a day and is declining by about 3.3 million
barrels a day, every year. Saudi Arabia pumps about 10 million barrels a day.
The math says a new Saudi Arabia has to be found every three years to offset
the conventional oil drop off. Good luck. Now you know why Russians, Canadians
and Americans are so keen to lock up the Arctic, the alleged keeper of vast new

About one-quarter of conventional
production comes from the 20 biggest fields and most of them are in decline,
some precipitously. North Sea oil production peaked at 4.5-million barrels a
day in 1999. This year’s production is forecast at between 1.2 million and 1.4
million barrels a day. The so-called Forties field, the North Sea’s biggest,
has been losing 9 per cent a year for more than 20 years. Ditto two other North
Sea biggies – Brent and Ninian.

Great Britain shed its status as an
energy powerhouse about a decade ago, when it became a net energy importer. Its
energy import bill is horrendous. Last year, Britain spent almost £22-billion
($38-billion) buying foreign oil, natural gas and coal.

Repeat all over the world, from Mexico
to Indonesia. Indonesia’s oil production has been in steady decline since the
mid-1990s, and the country has gone from oil exporter to importer, at which
point it got kicked out of the Organization of Petroleum Exporting Countries.
While new exploration and technologies will extend the life of some of the
gasping old fields, the long-term downward trend is intact.

The conventional fields are running out
of puff just as world demand is climbing again, which can only put upward
pressure on prices. This week, the IEA estimated that oil demand will rise by
1.2 million barrels a day in 2014, or 1.3 per cent, to 92.4 million barrels.

The increase is driven by economic
recovery and ever-rising demand in China and elsewhere in the developing world.
China is willing to pay almost any price for oil because oil drives growth more
than it does in the West, where energy use is less intensive per unit of
economic output. China has also developed a love affair with traffic jams. The
number of cars and motorbikes in China increased twentyfold between 2000 and
2010. It is forecast to double again in the next 20 years.

The oil shills, the tech geeks and
most, but not all, oil companies would have you believe that non-conventional
energy will fill the gap as the cheap, easy-to-pump oil heads gently into the
night. It might, but at what price and cost to the environment? Or it might not
at any price.

Deep-sea production is monstrously
expensive and risky, as BP found out when its Macondo well in the Gulf of
Mexico blew up. The Alberta oil sands also spew out more carbon dioxide than
conventional production. Most biofuels, such as U.S. corn-based ethanol, are
taxpayer-subsidized economic horror shows with dubious environmental benefits.

The peak oil crowd has thinned out, to
be sure, but it won’t disappear. Gushing U.S. shale oil doesn’t mean oil is
about to become cheap and plentiful. The fall off in conventional oil
production is real, and scary.